New Keynesian versus Old Keynesian Government Spending Multipliers
22 Pages Posted: 9 Mar 2009
Date Written: February 2009
Renewed interest in fiscal policy has increased the use of quantitative models to evaluate policy. Because of modelling uncertainty, it is essential that policy evaluations be robust to alternative assumptions. We find that models currently being used in practice to evaluate fiscal policy stimulus proposals are not robust. Government spending multipliers in an alternative empirically-estimated and widely-cited new Keynesian model are much smaller than in these old Keynesian models; the estimated stimulus is extremely small with GDP and employment effects only one-sixth as large and with private sector employment impacts likely to be even smaller.
Keywords: fiscal multiplier, new Keynesian model, fiscal stimulus, government spending, macroeconomic modeling
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